Monday, December 31, 2007

theIPOguru has a listing strategy for the new issues - Brigade Enterprises & eClerx Services. While the former is a real-estate developer (with a focus on residential properties) with Bangalore-centric business interests and other nearby areas like Mysore, the latter belongs to the fast emerging Knowledge Process Outsourcing sector. eClerx Services will be the first listed KPO on Indian bourses. Read the listing strategies for the two issues here and here.

- The employable population is set to account for close to 65% of the total population over the next 10-15 years

- More than 40% of the students drop out by eighth standard. Read this pdf on a survey on Primary education & the level of drop outs in Maharashtra.

- The ever-expanding share of the services sector in the overall GDP. Fast-growing sectors such as finance & banking, IT & ITES, insurance, engineering, organized retailing, etc. require employees with some form of formal education.

Total spend by the GoI on the education sector is set to cross Rs.1.25 lac crore in fiscal 2008. IT is expected to account for anywhere between 7-10% of this spend, resulting in an opportunity worth Rs.8,750 - 12,500 crore.

To know more about this sector and its concerns & prospects, refer to the following links:

Friday, December 28, 2007

I had written about Monsanto India a few days ago. Then, the stock was trading at Rs.1,550. The stock has since moved up to Rs.1,942, a gain of 25%. Have put some more information on the stock in the form of links alongwith an excerpt below:

Link 1:In India, management believes its cotton trait product has the potential to be planted on 15 to 20 million acres by 2010.Worldwide demand for cotton is projected to grow by about 20 million bales or 16 percent in the coming decade, according to an analysis published by Texas Tech University's Cotton Economics Research Institute in May 2007. China will remain on top in production, and the United States will fall to number three. India will rise to the second spot on the heels of recent technological breakthroughs in seed and production practices, according to the forecast.

When Hugh Grant took the top job at Monsanto in May, 2003, the company's nickname in some quarters was "Mutanto." A growing chorus of critics warned that Monsanto's genetically modified plant seeds would wipe out the monarch butterfly, give people virulent new allergies, and reduce the planet's agricultural diversity. Author Jeremy Rifkin predicted that genetically modified organisms (GMOs) would turn out to be "the single greatest failure in the history of capitalism." Paul McCartney urged the world to "say no to GMO." Prince Charles wrote an editorial arguing that genetic engineering takes "mankind into realms that belong to God and to God alone." During the 12 months preceding Grant's elevation, Monsanto's stock price fell nearly 50% to $8 a share. In 2002, the prior fiscal year, the company lost $1.7 billion. "We were pretty financially fragile," recalls Grant, 49, who speaks with the lilt of his native Scotland. Fewer than five years later, Monsanto is thriving. The St. Louis company's net income leaped 44% last year, to $993 million, on $8.5 billion in revenue. Monsanto shares, which closed at $104.81 on Dec. 5, have risen more than 1,000% during Grant's tenure. At 58.6, the company's price-to-earnings ratio is about two points higher than Google's. These numbers reflect a broader story: that Monsanto has quietly turned the tide in the war over genetically modified foods.

Over the last decade, innovation for ag-operational companies has focused more on the input side and how a farmer can get more benefits through seeds, Casale said. The shift has transformed investment in agriculture by both seed and chemical companies," he said. Monsanto spends about 10% of its total sales, which are expected to hit $10 billion next year, on research and development. Syngenta and other major seed producers also have robust research and development budgets and a pipeline of seed and chemical products to show for it. A majority of the spending focuses on genetically modifying seeds in order to produce a higher yield, said analyst Bill Selesky of Argus Research. If one result of global climate change could be increased drought, then drought-resistant corn and other crops would certainly help mitigate this stress," Selesky said. Seeds also are being genetically modified to withstand pesticides, resulting in better crop yields."Today, farmers are getting more bang for their buck," Selesky said.

Monday, December 24, 2007

Investment Objective: The primary investment objective of the scheme is to seek to generate continuous returns by actively investing in equity and equity-related or fixed income securities of power and other associated companies. The scheme has been a top performer in recent weeks, delivering a phenomenal 109% return over the last 12 months. Link.

However, a closer look at the most recent fact sheet indicates some interesting developments. One, the scheme holds close to 32% of its assets in debt, derivatives, cash & other receivables, two, it holds very little of NTPC (the largest power generation company in India by miles) and nothing of Power Grid Corporation (the largest power distribution company in India, a monopoly at this point of time) and three, the scheme has mopped up close to Rs.2,380 crore in the last four months ended 30th November 2007.

I think the first point, i.e. holding close to 32% in debt, derivatives and cash is a clear indication of Reliance Capital getting significant allocations during the IPO of Reliance Power. And, given how most of the Reliance group (ADA or MDA) stocks have fared over the past few years, it won't be surprising if Reliance Power does well too, infact very well. This, despite the fact that Reliance Power might not earn great revenues till 2010-11. Well, if Reliance Petroleum can command a mcap of over a lac crore without refining a single drop of crude oil, then so can Reliance Power !!!

Point two is a little perplexing given that both, NTPC and Power Grid are light years ahead of their competition so to that extent any play of the power sector it incomplete without the two. And, it is quite ironical that NTPC, which is around 6 times bigger than Reliance Energy & Tata Power (in terms of sales) and around 8-10 times bigger (in terms of bottomline), is quoting at a P/E of 24 times whereas Reliance Energy and Tata Power are quoting at 33 times and 51 times respectively.

The third point (i.e. Reliance Power fund mopping up close to Rs.2,380 crore and most of it lying on the sidelines) indicates that their is still some more steam left in the power sector rally. Personally, I think most of the stocks in this sector are quoting at unheard of valuations. But, then history tells us that most of the bull markets end up in excesses.

Talking of power sector valuations, you may want to see these three charts that I had prepared a couple of weeks back. The charts provide a bird's eye view of the various segments of the power sector, their financial performance over the past three years and their current valuations. One sector that stands out is Power Cables. The sector has been growing at a rapid clip and is also attractively priced. Among the companies in this sector, I have taken a small exposure to Nicco Corporation.

Saturday, December 22, 2007

Someone I know happened to visit one of Le Meridien's hotels recently. He gave me an interesting note he found attached to the 'bathrobes' at Le Meridien's. Here's how it goes...

"This bathrobe has enjoyed considerable success among our guests, to the extent that some particularly enthusiastic customers have become "collectors of Le Meridien bathrobes". While we recognize that this initiative helps spread the reputation of our establishment, we nevertheless urge our most fervent supporters to make an effort to separate themselves from this admittedly endearing garment when they leave. (Alternately, a bathrobe may be obtained in exchange for a few rupees)."

This is one of the most awesome "even if sarcastic" messages I've come across. Good one, Le Meridien !

Tuesday, December 18, 2007

Jyothy Laboratories, owner of brands like Ujala and Maxo recently came out with a public issue. The issue was primarily aimed to provide an exit route to its early investors, to that extent the issue was an offer for sale. The stock is listing on the bourses tomorrow.

Despite the current weakness in the market, we expect shares of Jyothi Laboratories to list at a healthy premium. At the upper end of the price band, the issue was priced in at a P/E of 21 times. Given that most of the FMCG companies are quoting P/Es of anywhere between 25-30 times, it will not be surprising if Jyothi Laboratories also lists at a similar multiple. With strong brand equity, wide distribution network, and well-distributed & tax-efficient production facilities, Jyothi Laboratories is a stock for the long haul.

Listed peers Advanta and Kaveri Seeds are quoting at a P/E of over 25 times.

Investment Argument:

# BIG OPPORTUNITY - India is home to the world's largest tract of arable land, yet its farm's produce yields that are a fourth of the global average. This augurs well for companies offering agro-chemicals (especially herbicides) and hybrid seeds, which improve farm yields significantly.# HIGHER DEMAND - Rising Consumption of Corn in India, thanks to increased consumption of western foods like Pizza, Sizzlers, and an increased usage of baby corn as a part of day-to-day cooking. Corn is also an important source of bio-diesel. Monsanto has a big winner in this category - 'Dekalb' (corn hybrid seeds). It is a global leader in corn seeds and has close to a 30% share in India.

# INCREASED AREA UNDER CULTIVATION - Higher crop prices, both in India and globally, and improving demand have resulted in a substantial shift from some of the other cash crops to corn. This year's Kharif crop pattern indicates this. Area under cultivation amounted to 74.6 lac hectares, as compared to the normal area of 62.2 lac hectares.

# STRONG PIPELINE - Monsanto India's parent company has a strong pipeline of new age hybrid seeds. R&D plays an important role in this industry with leaders such as Monsanto and Syngenta spending a significant amount of their revenues towards R&D.

# ROBUST RESERVOIR STATUS - Water levels in the 81 major reservoirs is healthy. They amounted to around 119% of the 10-yr average levels. Healthy water reservoir levels are an insurance against bad monsoons, and therefore render some predictability to the overall farming activity in India, which in turn determines the demand for farm inputs (such as herbicides and hybrid seeds, alongwith fertilizers).

At the current prices, the company can also be considered as a buy-back candidate. Infact, given that promoters hold close to 72.15% of the total equity, the cost of a buy-back will not be too high. Assuming, the company were to decide to undertake a buy-back, lets do some back of the envelope calculations -

Buyback price - Rs.3000 per shareMcap at the aforesaid price - Rs. Rs.2,581 croreCost of the buy-back - Rs.718 crore (for a 27.8% share)Current Cash & CE - Rs.250 croreActual cost of the buy-back - Rs.469 croreAnnual Cash Flow - Rs.92 crorePay-back period for the Company - 5.1 years. (Assuming 'NO' growth in cash flows, which is quite unlikely). Thus the pay-back period can be close to around 4-4.5 years.

Overall - At the current price, the Monsanto India scrip offers significant margin of safety with a healthy upside potential.

Points / Counter points ?????

Disclosure: Have a long position on this stock in the portfolios that I manage.

Tuesday, December 11, 2007

With reference to the earlier announcement dated July 30, 2007, relating to the signing of the term Sheet with Prysmian Cable Molding BV, Netherlands, Nicco Corporation Ltd (Nicco) has informed BSE that the Company has late last night entered into definitive agreements with Prysmian (Dutch) Holdings BV on the following basis:

1. Nicco and Prysmian (Dutch) Holdings BV belonging to the Prysmian group shall jointly participate in a new Company called Nicco Cables Ltd; where Prysmian (Dutch) Holdings BV shall become the majority shareholder (60%) with the Company holding 40%.

2. Prysmian Group is a world leader in the energy and telecommunications cables Industry with strong market position in higher-added value segments.

3. NICCO Cables Ltd, will acquire the Cable business from the Company pursuant to a Scheme of Arrangement and / or on slump sale basis, and shall be the Joint Venture Company. The common participation into the joint venture and the transfer of the business are subject to conditions precedent including approvals / consent of the Shareholders, lenders / CDR, Hon'ble High Court and other requisite parries / authorities as may be applicable.

- The Joint Venture will benefit from the combination of Prysmian's global knowledge and technology expertise and Nicco's business network and knowledge of local market and will be also well positioned to exploit the strong growth trends in Indian Cable market driven by substantial investments in infrastructure.

4. The main features of the contractual arrangement in relation to the Joint Venture Company are as under:

a) The Board of the Joint Venture Company shall consist of five Directors, three of them including the Managing Director to be appointed by Prysmian and two of them, including the Chairman, to be appointed by Nicco, Mr. Rajive Kaul, Chairman of Nicco shall be the Chairman of the JV Company. Prysmian will be responsible for managing the Joint Venture's operations.

b) Nicco shall receive a consideration in excess of Rs 130 crores, (subject to adjustments), for the transfer of its cables division. The transaction will also result in, inter-alia, the debt relating to the cables business getting transferred from the Company to the Joint Venture Company.

- Nicco Corpn will hive off its cable biz and the debt attached to it- Nicco Corpn will receive an additional Rs.130 crore for this stake sale- Investors will therefore (probably) receive shares in Nicco Cables (the new entity) and will continue to hold some stake in Nicco Corpn.

- The question now is, what will the new Nicco Corpn (minus its cable biz) do?????

- And, what will the management do with Rs.130 crore that the company will receive from Prysmiam???

The company has two divisions - cables and project engineering. However, the cable division (that includes both telecom cables and power cables) accounts for close to 80% of the total sales. With both the telecom and the power sectors doing very well, demand for Nicco's wares is firmly in place. However, owing to operational and financial troubles, the company's networth almost turned negative in recent years.

Sonata Investments' (Anil Ambani-Rel. Energy group co.) stake in this company is around 14.75%. The investment arm of the ADAG group is known to have made some smart investments in the past, e.g. TV Today, SAREGAMA, and a host of other media companies. So what could have interested the ADAG group to pick up a stake in this troubled company ?? As of now, I have no idea about the same.

However, there are some other interesting developments taking place at this counter -

Prysmian signed a term sheet with Indian Nicco Corporation for a majority stake of a New JV Cable Company

Milan 31st July 2007.Prysmian Cables & Systems, a worldwide leading player in the cable industry, has signed a Term Sheet with Indian Nicco Corporation to become the majority shareholder of a new joint venture company that will encompass all Nicco Corporation's cable activities.The Board of Directors of Prysmian today approved in principle the entrance into the Term Sheet. The deal, subject to the finalization of a definitive agreement and further approval/consent of Nicco's corporate debt lenders and relevant local authorities, is expected to close during the first half of 2008. Nicco Corporation will remain as a minority shareholder of the new Joint Venture Company.

With net sales of 55.2 million Euro in Fiscal Year 2006-2007 Nicco Corporation's cable division has 2 manufacturing operations, 6 branch offices located in the country's most important urban areas and approximately 900 employees. Nicco Corporation's cable division is active in the production of a wide range of medium voltage and low voltage power cables and industrial cables for applications in several sectors (OEMs, Windmill, Infrastructure, Mining, Raylways, Defence, etc.).

Now the question is, if the cables division will be hived off, what will Nicco Corporation do? Only Project Engineering? Whether the new cables company (in JV with Prysmian) will be a listed company? The management has provided no clarity on this.

Another interesting (both positive and negative) bits on the company include:

- 25% Holding in Nicco Parks (mcap - Rs.41 crore, Nicco Corp's stake value - Rs.10 crore). Reports have it that Nicco Parks owns 40 acres of prime land in Kolkata (something I still need to confirm), which is valued at close to Rs.2000 crore, valuing Nicco Corp's stake in the company to Rs.500 crore (vis-a-vis its current mcap of Rs.317 crore).

- Steady decline in promoter's stake in the company, down from 17.4% to 16.9% (during Mar - Sep '07).

Conclusion: Something seems to be cooking up on this counter. What, is the question?

Disclosure: I own shares of Nicco Corp, bought at Rs.24 per share. The stock is fraught with high risk (thanks to the uncertainties mentioned above) and therefore forms a very small portion of my portfolio.

Saturday, December 01, 2007

It's been more than 3 months since I last blogged. During this hiatus, I made a whole host of new investments and am currently working on a few more ideas. Will share each of these over the next few weeks. Have altered my approach towards money management too. The focus now will be to keep a well-balanced portfolio, that includes both growth investments and value stocks. The ratio I am comfortable with is around 60:40, in favour of growth stocks.

Growth stocks - Stocks that are currently under-researched or are still evolving but offer great promise in the long run. The two key factors here are - scalability of business (growth potential) and the management (growth engine).

Value Stocks - These are mis-priced stocks available at significant discount to their 'current' fair value. The key factors to look here are - P/E, P/B, [ lower the better] and Return ratios (RONW or ROCE) [higher the better]. Some of the investments in this category may include stocks that are currently undergoing some kind of a restructuring, which is likely to yield results at a later date.

The ratio 60:40, in favour of growth stocks, will primarily work in this way - profits out of value investments will be pumped into growth stocks, given that most of the growth investments take time to mature.

Further, instead of investing in lumps, I've started investing in a more systematic manner. The rule is 10% of my monthly basic salary is put into stocks.

I hope my new and fine-tuned (or so I think) investment plan works fine, it has done so far in the past few months, but then 3-4 months is too short a period to gauge any performance.